For over a year, Russian bankers have looked to the rouble bond market as their personal risk-free Vegas.
Too scared to lend directly to corporates, Russian banks have found they don’t have to – thanks to central bank stimulus measures that allow them to reap risk-free returns of 130 – 170 basis points on rouble paper, simply by borrowing money on the market and buying up central bank bonds.
While the system has functioned well for Russian corporates which have been able to issue $23.1bn in rouble debt this year thanks to falling borrowing costs, economists at Troika Dialog, the Moscow investment bank, warn the situation will soon take its toll on Russia’s financial system.
Russia’s broad monetary base has already grown 46 per cent year-on-year in the first six months of 2010, and the central bank has done nothing to help matters by expanding its bond offerings, they say.
The central bank’s “nice, risk-free” bond offerings give banks ample returns “for doing nothing but simply borrowing on the market [and] inflating [their] balance sheet”, they say. Banks will buy the central bank bonds but use them as collateral simply to borrow more on the market the next day. Read more
A warning was also issued to forex speculators as the Bank said its currency interventions were “directed mainly at neutralising the firm expectations of forex market participants”. Oil price rises can heighten speculation of a rouble rise, as the Russian economy is heavily dependent on the stuff.
Russia is getting richer. The rouble is gradually being allowed to strengthen, which will allow Russians to import more, addressing their trade surplus. The process is being carefully managed, however, with the central bank cushioning each move.
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